Brookside

Falling dollar threatens German car manufacturers in the U.S.
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German car manufacturers are caught between the rock of stagnating markets at home, and the hard place of a falling dollar which threatens to destroy profits in the lucrative American market.
After reporting a general improvement in 2006 first quarter profits and sales, European manufacturers could have been forgiven a smug interlude.
But unfortunately for them, and particularly the German luxury manufacturers, latest sales data for April shows feeble markets, and the accelerating strength of the euro against the dollar threatens to unravel the financial position of luxury car manufacturers BMW, Mercedes, Porsche, and VW's Audi subsidiary in the U.S.
The dollar began slipping against the euro late in 2005, and has gathered speed since April, with some commentators expecting the euro to hit $1.30 soon. (On May 16, the euro closed at $1.28 in New York).
Italy's Fiat, and Peugeot of France have no presence in the U.S. market, while Peugeot's compatriot Renault is exposed to the U.S. only through its alliance with Nissan of Japan.
European car manufacturers' first quarter results were generally impressive. Renault surprised many investment bankers with much higher than expected revenues, despite falling unit sales.



Sudden dollar weakness
But the outlook for the German manufacturers, including upscale Porsche, has suddenly been clouded by worries about the dollar's weakness.
A study from Deutsche Bank shows that if the dollar fell 10 percent against the euro, BMW's annual net profit would be slashed by $730 million, DaimlerChrysler's by $630 million, and VW's by $725 million. Porsche would take a $230 million hit.
In the first 4 months of 2006, European brands sold 360,000 vehicles in north America, up 10.7% compared with the same period of 2005, led by BMW with 88,353 -- up 21.6%, closely followed by VW (excluding Audi) 73,824 -- up 21.6% and Mercedes (72,572 +17%), according to Autodata.
These booming sales figures could be in jeopardy.
BMW had looked unstoppable, until the dollar's slide suddenly quickened. Last year it overtook arch-rival Mercedes Benz as the world's leading luxury car manufacturer. Investors had expected the profit target to be met in 2006, and progress to carry on.
CEO Helmut Panke said 2006 will be the most successful year in BMW's history, with the launch of 3-series coupe in September, and the new X-5 and Mini later in the year to keep the customers satisfied.


Well hedged for 2006

Citicorp also sounded the alarm bells about the threat to German profits in the U.S., although it pointed out that for the rest of 2006, all German car makers are believed to be well hedged against expected dollar fluctuations.
"The 4 German car names (Citicorp includes Audi with its VW parent) have by far the greatest exposure to dollar change of Europe's automakers, with between 14 and 34 percent of sales in North America. All have significant financial hedging in place," said Citicorp said in a report.
Currency hedging involves the companies using financial transactions to protect or insure income against fluctuating exchange rates.



"All save Porsche also have a form of natural hedging in place using local assembly operations, although these are being expanded in all cases," according to Citicorp.
About 14 percent of VW's total sales are in the U.S., 34 percent of Porsche's, 23 percent of BMW's and 8 percent of DaimlerChrysler's, says Citicorp.
Citicorp was relatively sanguine about the German's prospects at current rates, although an extended period of the recent lower dollar rate against the euro might prompt a reevaluation.



Worries mount for 2007, 2008
"There are few worries for 2006 earnings with all the assemblers covered, but DaimlerChrysler and BMW are at most risk in 2007 and 2008, having declined to hedge at current rates. VW moves from being one of the least to best covered assemblers, extending its cover for up to 54 months, albeit at less favorable rates than fully hedged Porsche," Citicorp said.Standard & Poors also expects European sales for the rest of 2006 to be broadly stable, although it sees profitability declining.
Maria Bissinger, S&P analyst based in Frankfurt, Germany, fretted about the impact of the sliding dollar against the euro on BMW, VW-Audi, and Mercedes, and pointed to another foreign exchange factor that will hurt them: Asian manufacturers pushing into Europe, also benefiting from the strengthening of the euro.


Neil Winton, European columnist for Autos Insider, is based in Sussex, England.

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Imhotep Evil

Well this is bad.

From what I've read BMW lost ~670 million euro, or was it dollars, because of this fall of the dollar.

Deutsch

so what's the long term solution??? any ideas??? I personally don't know too much about exchange rates, could learn more. Please educate me??? Thanks!!!

Brookside

Deutsch

A "tough one" indeed, if the ever 3er approaches $50k that's it, all bets are off.

Brookside

dOmInIX

With some additional equipment it can easily reach €50 k here. I think that's not a fair price. The same thing is w/ C270, €50 K..But hey, this is Europe!

Beemer B773ER

Similar to how the majority of airlines are seeing their profits decline in the face of rising fuel costs.... the simple answer is hedging. All 4 German marques already do that, so there really isn't much to worry about it terms of going bankrupt or anything, but yes, it will erode profits.

It will be very interesting to follow the US and Global sales for BMW, MB and Audi over the next few months. In another thread, I compared the global sales for the 3 brands for Jan-April and all I saw was a fluctuating trend for all 3 of them. There is little consistency in sales numbers, but the reasons behind that I can't figure out.

Here's the thread i'm talking about:http://www.germancarzone.com/showthr...?t=4088&page=2

Osnabrueck

"Falling" Dollar?

Um.... the dollar has been yo-yo'ing between anywhere from $1.18 on the Eruro to as bad as $1.35 since 2002. Take my word for it, there's nothing new about the Germans having to grapple with a weak dollar.

(And please Bozzor, get me if I'm wrong.)

YoungWarrior

Why dont they just open some factories in America then?

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